Selling Your Business? The Purchase Price Isn't the Whole Deal

What Sellers Need to Know About Deal Structure

I've had business owners come to me after they've already received an offer or signed a Letter of Intent and say, "Jeremy, can you take a look at this?"

That's one of the hard things about selling a business.

The purchase price gets everyone's attention. It should. It's the number you've spent years building toward.

But here's what many first-time sellers don't realize:

The purchase price is only one part of the transaction.

How the deal is structured can affect taxes, cash at closing, future obligations, risk, and ultimately what you walk away with. That's why I encourage business owners to start conversations about deal structure long before they're negotiating a Letter of Intent (LOI).

Our friend and M&A attorney Adam Plunk recently wrote an excellent article, "Selling Your S Corporation? Why the F Reorganization Should Be Your First Conversation." If you own an S corporation and are considering a sale, I highly recommend reading it. Adam explains the legal and tax mechanics of an F reorganization and why it can be an important planning strategy.

From my perspective as an M&A advisor, Adam's article reinforces a lesson I've seen throughout my career:

When a buyer proposes a particular deal structure, don't assume it's the only way the transaction can be done. Ask whether there's another structure that could better align with your goals.

The LOI Is About More Than the Purchase Price

Many first-time sellers receive a Letter of Intent and immediately flip to the purchase price.

I understand why. That's the number you've been waiting to see. But when I review an LOI with a seller, that's only the beginning of the conversation.

I'm asking questions like:

• Is this an asset purchase or an equity purchase?

• How much cash is being paid at closing?

• Is part of the purchase price tied to an earnout?

• Is the seller expected to roll equity into the new company?

• How much working capital is expected to remain in the business?

• What assumptions has the buyer already built into the structure of the transaction?

I've seen sellers get excited about an offer before they fully understood those answers.

A purchase price that looks great on paper can become much less attractive once you understand the rest of the deal. That's why we evaluate the entire transaction, not just the number at the top of the page. Our job as M&A advisors is to help sellers understand what they're actually agreeing to before they sign—not after due diligence begins. That's often where experience makes the biggest difference.

Buyers Usually Have a Reason for the Structure They Propose

Experienced buyers rarely choose a deal structure by accident.

Private equity groups, family offices, and strategic buyers complete acquisitions regularly. They have attorneys, accountants, and transaction professionals helping them evaluate risk, taxes, financing, and future value.

When a buyer proposes an asset purchase, there's a reason.

When they ask for an earnout, there's a reason.

When they propose rollover equity or a specific working capital target, there's a reason.

As the seller, you deserve to understand that reason. Not because you should automatically push back. But because understanding what the buyer is trying to accomplish allows your advisory team to ask a better question:

Is there another way to accomplish the buyer's objective while creating a better outcome for the seller?

That's exactly why Adam's article on F reorganizations is so valuable.

Why First-Time Sellers Get Caught Off Guard

One advantage buyers often have is experience.

Many buyers have completed dozens(more likely, even hundreds) of acquisitions.

Most business owners will only sell one company. That doesn't put the seller at a disadvantage. It simply means the seller needs experienced advisors sitting on their side of the table.

One of my responsibilities is helping sellers understand which terms are standard, which terms are negotiable, and which questions should be asked before the deal moves forward.

Because once everyone understands why a buyer is requesting a particular structure, we can evaluate whether another approach might accomplish the same objective while better aligning with the seller's goals.

An F Reorganization Is a Great Example

Adam's article provides a perfect example.

As he explains, sellers of S corporations often prefer an equity sale, while buyers frequently prefer an asset purchase. At first glance, those positions can seem incompatible. But in certain situations, an F reorganization may provide another path.

When properly structured by experienced tax and legal professionals, it can allow the transaction to remain an equity sale from a legal standpoint while providing the buyer with tax treatment similar to an asset purchase.

I'm intentionally simplifying the explanation because Adam covers the technical details far better than I can.

The lesson for business owners isn't that they need to become experts in F reorganizations.

The lesson is this:

A seller who doesn't know another option exists may never realize there was another path available.

That's why experienced advisors matter.

Have the Conversation Before You're Negotiating the LOI

Here's where I've seen sellers put themselves in a difficult position. They begin asking these questions after they've negotiated the Letter of Intent. By then, the buyer has already built expectations around a particular transaction structure.

The LOI reflects those assumptions.

Due diligence is beginning.

Everyone wants to maintain momentum.

Can the structure still change?

Sometimes.

But it's a very different conversation than raising those questions before you've agreed to the basic framework of the deal.

That's why I encourage sellers to start these conversations early.

You don't need to know exactly how your future transaction will be structured before you go to market. You may not even know who the buyer will be. But if you own an S corporation, your M&A advisor, CPA, and M&A attorney should already be thinking about these possibilities long before a Letter of Intent lands on your desk.

You Don't Have to Become an M&A Expert

Most business owners sell one company in their lifetime.

You shouldn't be expected to understand F reorganizations, 338(h)(10) elections, rollover equity, working capital targets, earnouts, or every other concept that may come up during a transaction.

That's why your deal team matters.

My job isn't to provide tax or legal advice.

My job is to understand the transaction, recognize what the buyer is trying to accomplish, and help the seller understand how the proposed structure supports—or conflicts with—their goals.

When tax or legal questions arise, we bring the right experts into the conversation.

Sometimes the most valuable question we ask isn't whether the buyer's proposal is acceptable.

It's this:

"Is there another way to structure this transaction that accomplishes the buyer's objectives while creating a better outcome for the seller?"

That's a conversation experienced deal teams have every day.

Five Questions Every Seller Should Ask

Before agreeing to a proposed deal structure, ask your advisory team:

• Why is the buyer proposing this structure?

• How does this structure affect what I ultimately receive from the sale?

• What obligations or risks am I accepting?

• Are there alternative structures that could accomplish the buyer's objective?

• Have my CPA and M&A attorney reviewed the proposed structure?

You don't need to know every answer yourself.

But someone sitting on your side of the table should.

Understand the Deal You're Agreeing To

At NorthStar, our goal is to help business owners successfully transition their companies and become members of the 17% Club.

That means getting the transaction closed. It also means helping sellers achieve the goals that brought them to the table in the first place. I've seen enough transactions to know that the purchase price gets everyone's attention. But the details of the deal determine what that number actually means.

The best transactions aren't simply the ones with the highest purchase price.

They're the ones where the purchase price, structure, terms, and outcome all align with the seller's goals.

If you own an S corporation and are considering a sale, I encourage you to read Adam Plunk's article and start this conversation with your M&A advisor, CPA, and attorney before you're negotiating a Letter of Intent.

Don't just ask:

"What's the purchase price?"

Ask:

"How is this deal structured, and what does that mean for me?"

That question may be one of the most important you ask during the entire transaction.

About NorthStar Mergers & Acquisitions

Based in Dallas, Texas, NorthStar Mergers & Acquisitions guides business owners through one of the most significant financial and emotional journeys of their lives—the sale of a company. Specializing in lower middle-market transactions across multiple industries, NorthStar combines deep valuation expertise, strategic marketing, and buyer engagement to ensure every client achieves their dream exit.

Visit NorthStar-Mergers.com to learn more about how NorthStar helps business owners navigate their ideal transition.